Reply To: Negative Interest Rates


According to the Bloomberg report, the BoJ has set the “interest rate” it charges commercial banks on “new” reserve balances that they hold at the BoJ.

The BoJ is not the only central bank that is currently charging commercial banks for adding to their excess reserve balances. These charges, the BoJ’s is 0.1 percent, are not interest rates at all but fees designed to prevent commercial banks from continuing to build their excess reserve positions. The BoJ hopes that commercial banks will begin to make more loans instead of building up their excess reserves.

The Federal Reserve has a similar policy of paying “interest” on commercial bank reserves. Like the BoJ, the Fed has two tiers of “interest” it pays, one rate on required reserves and one rate on excess reserves. Currently the Fed has both “rates” set at 0.50 percent.

The Federal Funds rate is an actual interest rate, namely, the one on inter-bank, over-night loans. The Fed targets this interest rate when conducting monetary policy because they consider it a gauge of the scarcity of reserves in the banking system. Federal funds loans are the trade of reserves among banks. The Fed manipulates this rate by supplying more reserves to banks through open market operations. The Fed assesses the degree of monetary expansion from such policy by watching the Federal Funds rate.